This is a continuation of our series on Doing Business in Nigeria. Every prospective business owner must decide whether it will be a Business Name (BN) or a Limited Liability Company (LLC). The choice depends on the type of business you run, how many owners it would have, and your financial situation. No one choice suits every business: Business owners have to pick the structure that best meets their needs. Through this article you will be introduced to the most important factors to consider which can be broadly categorized as:
– Risks, Liabilities & Contributions
– Formalities & Expenses.
– Tax
– Investment Needs.
- Risks, Liabilities & Contributions
In large part, the best ownership structure for your business depends on the type of services or products it will provide. If your business will engage in risky activities — for example, trading stocks or repairing roofs. You’ll almost surely want to form a business entity that ensures your liability is limited e.g. one that shields your personal assets from business debts and claims. BN’s on the other hand does not differentiate between your personal and business assets but is suitable for Professional Partnerships and Sole Proprietorships.
If your business also involves working with multiple partners with varying degrees of contribution to the business venture it’s advisable that you form a LLC which allows you allocate shares in accordance with the contributions of the Shareholders/Directors.
- Formalities and Expenses
BN’s are easier to set up e.g. you don’t have to prepare any special forms and its much cheaper to register than LLC’s. In Nigeria you don’t even need the services of a Lawyer to register a BN. LLC’s, on the other hand, require more expertise and are more expensive. To form an LLC you will require the services of either a Lawyer or a Chartered Accountant who are the only persons accredited by CAC to incorporate LLCs. In addition, LLC’s are mandated to run their business in accordance with the rules contained in the Company’s Act (CAMA) They also have to keep records of important business decisions and follow other formalities.
If you’re starting your business on a shoestring, it might make sense to register a BN which is the simplest type of business entity.
- Tax
LLCs and BN’s are almost identical when it comes to taxation. In both types of businesses, the owners report business income or losses in fact, LLC and BN’s file the same informational tax return with the FIRS.
- Investment Needs
LLC’s allow a business to sell ownership shares in the company through its stock offerings. This makes it easier to attract investment capital and to hire and retain key employees by issuing employee stock options.
But for businesses that don’t need to issue stock options and will never “go public,” they might consider a BN.
CHANGING YOUR MIND
Your initial choice of a business structure isn’t set in stone. You can start out as a BN and if your business grows or the risk of personal liability increases, you can convert your business to an LLC.
Good Luck!!
